NBFC

Introduction
Definition
• Financial institutions which provide the various banking facilities but are
not termed as banks because they do not hold the banking license are
known as the Non-Banking Financial Institutions (NBFC).
Characteristics
• Company registered under the Companies Act 1956
• Engaged in the business of loans and advances, acquisition of shares/
stock/ bonds/debentures/securities issued by Government or local
authority or other securities of marketable nature, leasing, hire-
purchase, insurance business, chit business etc.
• Does not include any institution whose principal business is that of
agricultural activity, industrial activity, sale/ purchase/ construction of
immovable property.
Characteristics..
• Cannot accept demand deposits
• Is not a part of payment and settlement system and therefore
cannot provide cheque facility to its customers
• Deposits are not covered under the deposit insurance scheme.
• Acceptance of deposits by NBFCs are subject to restrictions.
All NBFCs cannot accept deposits from public. They have to
source their funds from issuing debt instruments, borrowings
from banks and financial institutions etc.
Role of NBFC
• Development of sectors like Transport and Infrastructure
• Substantial employment generation
• Help and increase wealth creation
• Broad base economic development
• Irreplaceable supplement to bank credit in rural segments
• Major thrust on semi-urban, rural areas and first time buyers/ users
• To finance economically weaker sections
Classification of NBFC
• RBI has classified the NBFCs as follows:
• Asset Financing Companies
• Investment Companies
• Loan Companies
• NBFCs are further classified as:
• Those accepting public deposits
• Those not accepting public deposits but engaged in financing
business
• Core investment companies
Categorisation of NBFC
• Equipment Leasing Company
• Hire Purchase Company
• Loan Company
• Investment Company
• Mutual Benefit Financial Company (MBFC) like Nidhis
• Miscellaneous Non-banking Companies (MNBC) like Chit
Funds
• Housing Finance Companies (HFC)
• Residuary Non-banking Company (RNBC)
Recommendations of Task Force
on NBFCs
Type of NBFC Acceptance of Public Deposits
NBFC with NOF less than 25 lacs Nil
EL / HP without investment grade 1.5 times NOF or Rs. 10 crore, w. e.
credit rating less
Subject to 15% CAR
EL / HP with investment grade credit 4 times NOF
rating
Loan / Investment companies with 1.5 times NOF
investment grade credit rating Subject to 15% CAR
Opening of NBFCs
• Certificate of Registration issued by RBI is compulsory
• Minimum NOF requirement for new companies is 200 lakhs
(Exception is companies formed before April 21, 1999 with
minimum NOF of 25 lakhs)
• Companies accepting public deposits should create reserve
fund
• Unsecured depositors would have first charge on liquid assets
and assets created out of the deployment of the part of the
reserve fund.
• Change in management, location, registered office etc. require
prior approval of RBI
Organisational Structure
Management Information
System
• Internal reporting system:
• Periodical statements showing the business position
• Statements from branches relating to advances, non-performing assets, asset
classification, ALM etc.
• External reporting system
• NBFCs are required to submit the following returns to the Department of
Non-banking Supervision at the Regional offices of RBI:
• Audited financial statements including the directors’ report presented in the
Annual General Meeting
• Annual Return on deposits
• Details of changes in the addresses, telephone numbers, names of directors,
principal officers, specimen signatures of the officials authorized to sign on behalf
of the company
• NBFCs with asset size over Rs.100 crore or public deposit of Rs.20 crore should
submit the following ALM half yearly returns:
• Statement of structural liquidity
• Statement of dynamic liquidity
• Statement of interest rate sensitivity
MIS..
• A half yearly statement of capital fund, risk assets/exposures and risk
asset ratio etc.
• Monthly Return on Exposure to Capital Market
• A quarterly return in NBS 3
• Every RNBC has to file a statement of position as on 31st March
every year
• A statement showing the names, designations and professional
qualifications of the principal officers, the names, qualifications and
residential addresses of directors and the specimen signatures of the
officers authorized to sign on behalf of the company
Financial Linkages between Banks
& NBFCs
• Banks and NBFCs are competing in some areas of business such as:
• Leasing and hire-purchase, corporate loans, investment in non-convertible debentures,
IPO funding, margin funding, small ticket loans, venture capital, etc.
• NBFCs do not offer facilities like savings and current deposits, cash credits,
overdrafts etc.
• Banks finance the operations of NBFCs by extending credit facilities or
subscribing to debt instruments
• RBI has introduced certain restrictions on the activities and permitted banks to
finance these areas. Such areas are:
• Bills discounted / rediscounted by NBFCs, except for rediscounting of bills discounted by
NBFCs arising from the sale of –
(a) Commercial vehicles (including light commercial vehicles); and
(b) two-wheeler and three-wheeler vehicles, subject to certain conditions;
Financial Linkages..
• Investments of NBFCs both of current and long term nature, in any
company/entity by way of shares, debentures, etc. with certain
exemptions;
• Unsecured loans/inter-corporate deposits by NBFCs to/in any company.
• All types of loans/advances by NBFCs to their subsidiaries, group
companies/entities.
• Finance to NBFCs for further lending to individuals for subscribing to
Initial Public Offerings (IPOs).
• Bridge loans or interim finance against capital/debenture issues
• Banks are not permitted to enter into lease agreements departmentally
with equipment leasing companies or NBFCs engaged in leasing activities
Structural Linkages between Banks
and NBFCs
• Banks and NBFCs can be established in private sector as well as
public sector
• Some of the NBFCs are subsidiaries/ joint ventures of banks
• RBI has restricted the investment by banks in a finance company to
10 per cent of its paid up capital and reserves and the total of all
such investments should not exceed 20 per cent of the paid up
capital and reserves
• Banks are required to obtain prior approval of RBI for making
strategic investments in NBFCs
• Obtaining Certificate of Registration from RBI is mandatory
• Foreign banks and financial institutions make such investments
through automatic FDI route and obtain certificate of registration
from RBI.
Regulatory Issues
• Revised Regulatory Framework for NBFCs introduced in November
2014 by RBI
• NBFCs are classified into NBFCs accepting Deposits (NBFC-D) and
NBFCs not accepting Deposits (NBFC-ND)
• NBFCs-ND with an asset size of Rs. 500 crore or as per the last
audited balance sheet is considered as Systematically Important
NBFC-ND
• All NBFC – ND – SI and NBFC – D are required to maintain Tier I
capital of 10%
• NBFC with asset size less than 500 crores are exempted from CRAR
and Credit Concentration Norms
• The others have to comply by Prudential and Exposure Norms